BofA On Treasuries: No Longer Buying Dips, Now Selling Rallies

By Michael Aneiro

Bank of America Merrill Lynch makes a subtle but significant change in strategy today, saying it’s moving from buying Treasuries on dips to selling during rallies. So no longer opportunistically shopping optimistically, but opportunistically selling pessimistically. More or less. From BofA rates strategists Priya Misra and Shyam S. Rajan:

Fundamentally, we have shifted from the camp of buying dips to selling rallies. While we are not super bearish, we have to acknowledge that many of the forces that had kept rates compressed for so long are subsiding (a Fed purchase program for nearly three years, downside risks, central bank demand, safe haven flows from Europe and bond fund inflows). Therefore we believe that 10s should settle down around 2.6-3% for the rest of the year….

Apart from better data and a different Fed reaction function, we are concerned about a continued slowdown in demand from traditional buyers. We look to sell if the current rally continues and we reach 2.4-2.5% on 10s.

When it comes to the Fed winding down its easing efforts, BofA says the critical issues are the pace of tapering its bond-buying program as well as what the Fed views to be the trigger for eventually hiking short-term rates. More from BofA:

We believe that the Fed is geared up for tapering by September and the market has priced that in…. However, the market is sensitive to the pace as was evident by the reaction to the [Fed's policy committee meeting] minutes, which suggested that half the participants were looking for an aggressive pace. Also, given the [summary of economic projections] forecasts of 6.5% [unemployment] by the end of 2014, the market is looking for clarity on what the Fed deems as enough to begin hiking.

Treasuries finished the day just slightly weaker, with the 10-year note down 3/32 in price to yield 2.586% and the 30-year bond down 2/32 to yield 3.631%, per Tradeweb data.

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